Indian Economy Review

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Anticipating correctly the softening of the headline retail inflation rate, the Reserve Bank of India had almost a week earlier cut the repo rate by 35 basis points from 5.74 per cent to 5.4 per cent. The repo rate is the policy rate at which the RBI lends money to the commercial banks to meet the latter’s liquidity shortfall. The 35-basis point reduction was announced on August 7 at the end of the RBI’s Monetary Policy Committee’s third bi-monthly monetary policy review of 2019-20. It also maintained its accommodative stance, indicating thereby that the central bank has taken the proposals of any rate increase in the near future off the table. And if optimists are to be believed, the maintenance of the accommodative stance also suggests that the central bank may remain open to further cuts in the repo rate, if necessary.

The RBI’s concerns over growth were obvious. Having achieved a reasonable degree of price stability, it was now turning towards the need for supporting growth. Prior to the August rate cut, the central bank had already announced a cumulative cut of 75 basis points in the repo rate since February 2019, although the transmission of that lower rate to the lending rates of commercial banks has been less than half. However, with the additional 35 basis points cut and provision of additional liquidity in the system, the outlook for greater transmission of the lower repo rate into the banks’ lending rates got better.

No recent development has had such a deep impact on the government’s responsiveness to industry as the death of Cafe Coffee Day owner, V.G. Siddhartha. The sequence of developments drew attention to the strained relations between the government and industry and underlined how the government’s approach to big business could do with a lot of overhaul. The media focus was on the mysterious disappearance of Siddhartha on July 29 and then on the discovery of his body in a river near Mangalore two days later on July 31, followed by the revelation that he had left a note before his disappearance, where he talked about his indebtedness and harassment by tax officials. While the income-tax authorities denied the accusation hurled against it, the government lost no time in addressing the concerns of industry due to an overactive tax department. Assurances were made by none other than Prime Minister Narendra Modi in a newspaper interview that honest business leaders have no reason to fear from the tax man and Finance Minister Nirmala Sitharaman also reassured industry that there would be no tax-related harassment.

The Companies (Amendment) Bill, 2019 was passed by Parliament, and these changes pertained to the issuance of dematerialised shares, re-categorisation of offences, penalties for auditors, increased threshold for compounding of charges by a regional director, rules on beneficial ownership and a bar on holding of offices by officials of companies. However, the amended law soon became a bone of contention, with industry unhappy with many of its provisions. The government has promised to review some of them and it is likely that a fresh amendment to the law would be made in the next session of Parliament.

A particularly objectionable amendment in the Companies Law was with regard to the provisions that impose corporate social responsibility (CSR) on companies. The rules with regard to the disclosure of non-spending of the stipulated amount of money on CSR schemes, equivalent to two per cent of profits, have been made more stringent, the unspent part of the amount now need to be transferred to a CSR account within a month and to government-specified funds, if they still remain unspent for three years. Failure to comply with such provisions will attract penalty including even imprisonment of up to three years.

So huge was the outcry over the regressive provisions of the new company law for CSR that the government has given clear indications that an exercise is on to remove the criminal provisions in the new law. However, even after the promise of decriminalising the new provisions is fulfilled, the intent of the new legislation will remain a bone of contention for industry.

The foreign trade data that came out on August 14 also failed to cheer the economy watchers. Merchandise exports in July 2019 were estimated at $26.33 billion, reflecting just 2.2 per cent growth over the same month of 2018. Cumulatively, the April-July 2019 merchandise exports at $107.41 billion were still 0.37 per cent lower than $107.81 billion achieved in the same period of 2018. A flicker of hope arose from the performance of India’s non-petroleum and non-gems & jewellery exports, as they grew by a higher margin of about 5.3 per cent in July, much higher than the 1.8 per cent growth seen cumulatively for April-July. The uptick in July was attributable to healthy double-digit growth in exports of electronic goods (51 per cent), drugs and pharmaceuticals (22 per cent) and organic & inorganic chemicals (13 per cent).

Imports in July 2019 at $39.76 billion offered no hope for revival in industrial activity with a 10 per cent contraction over the same month of 2018. Imports in the first four months of 2019-20 thus declined by 3.63 per cent, indicating that the pace of decline in imports quickened a bit in July, which was largely due to a steep decline in imports of pearls, precious and semi-precious stones (down 31 per cent) and petroleum, crude and products (down 22 per cent). That the decline in imports was not triggered just by petroleum or gold became evident from the fact that non-oil imports in April-July 2019 fell by 2.85 per cent. The decline was steeper at 4.67 per cent for non-oil and non-gold imports during the same period.

India’s merchandise trade deficit thus shrank to $13.83 billion in July 2019, compared to a deficit of $18.63 billion in the same month of 2018. For the April-July period, the trade deficit in 2019 was down to $59.39 billion.

Services exports, too, grew slowly at 8.65 per cent to $74 billion in April-July 2019. However, imports of services grew at a higher rate of 12.53 per cent at $47.57 billion in the same period of four months. With a surplus arising out of services trade, the overall deficit on account of merchandise and services trade for the April-July 2019 was estimated at $32.9 billion.

Such a level of overall trade deficit is not yet a cause for concern for the management of the balance of payments. Remittances and foreign direct investment flows do not show any signs of deceleration as yet. And foreign portfolio investments, though remaining skittish in the first few weeks after the presentation of the Union Budget on July 5 in view of a new taxation measure on their investments made through trusts, have picked up again after expectations that the new tax provisions may be suitably tweaked. International crude oil prices, too, have remained benign. In sum, the balance of payments looks to be out of harm’s way as of now and the current flows should be sufficient to take care of the combined deficit on account of merchandise and services trade.

India’s economic growth prospects did not look very bright this month. On August 9, the Central Statistics Office released the industrial growth numbers for June 2019. At 1.95 per cent, this was one of the lowest in recent months and a sharp deceleration over industrial growth in the previous two months - 4.32 per cent in April and 4.55 per cent in May. The industrial growth for the first quarter of the current financial year thus settled down at just 3.6 per cent, a sharp drop over the 5.1 per cent growth witnessed in the first quarter of 2018-19.

The more troubling aspects of India’s tepid industrial growth lay in what the numbers had to say about the manufacturing and the capital goods sectors. The manufacturing sector, which holds the key to both jobs creation and exports revival, grew by just 1.16 per cent in June 2019, compared to 6.9 per cent a year ago. The first quarter of 2019-20 thus saw industrial growth drop to 3.1 per cent from 5.1 per cent a year ago.

Worse, the capital goods sector, which is viewed as a proxy for investment activity in the economy, continued to contract for the second month running. In June 2019, it contracted by 6.5 per cent, compared to a healthy 9.7 per cent growth a year ago. The first-quarter growth figures for the capital goods sector thus showed a decline of 2.4 per cent, compared to a growth rate of 8.6 per cent in the first quarter of 2018-19. These numbers do not augur well for investment prospects for the economy.

Improving economic prospects somewhat were reports of a smart recovery in the monsoon rains that began in the last week of July and continued well into the third week of August. During the second week of August 2019, the country had received 45 per cent more rainfall compared to the 50-year average. And if the monsoon impact is measured from the start of the monsoon season on June 1, the country has so far received 1 per cent more rainfall than the long-term average. The monsoon recovery has caused problems of floods and landslides in many parts of the country, leading to loss of lives, estimated at well over 300, displacement of one million people and inundation of thousands of houses in as many as six states. But better rains have also helped the country overcome earlier fears of a drought. Now, better agricultural output can be expected to support overall economic growth in the second quarter of the current financial year. Agriculture accounts for about 15 per cent of the Indian economy.

Two more data points were released in August – one on August 13 and the other on August 14. Both of them throw fresh light on the state of the Indian economy.

On August 13, the inflation rate, based on the movement in the consumer price index, was released and it was estimated at 3.15 per cent for July 2019, a sharp deceleration from 4.17 per cent recorded a year ago in the same month. However, the consumer food price index indicated a movement in the opposite direction. The retail food inflation saw a significant increase from 1.3 per cent in July 2018 to 2.36 per cent in July 2019.

A day later, the wholesale price index presented the producer-level inflation to be more benign at 1.08 per cent in July 2019, a huge drop from the 5.27 per cent inflation rate registered in the same month a year ago. However, the wholesale price index-based inflation for primary articles (food items, cereals, vegetables, etc.) increased to over 5 per cent compared to 2 per cent a year ago in July 2018.

Three takeaways are too obvious to be ignored. One, the overall inflation rates in the economy remain modest. This is in keeping with the track record of the Narendra Modi government in the past few years, when price stability has been achieved in spite of many inherent pressures in the economy, including even a rise in crude oil prices. Two, the indications of a price escalation, if any, could be seen only in the food sector.

And three, the sharp divergence in the trends of consumer price index and the wholesale price index could indicate early signs of some pricing power coming back to producers of goods and services in the Indian economy. Wholesale price index-based inflation remaining at a level of about 1 per cent, much lower than the consumer price index ruling at an inflation rate of over 3 per cent could mean that the margin pressure on producers may be on the verge of easing a bit. To what extent this translates into actual benefits for producers of goods and services, however, will depend on a host of other factors.

The inflation forecasts for the next few quarters show a mixed picture. According to the RBI, retail inflation in the second half of the current financial year may inch up marginally to 3.5-3.7 per cent, compared to the earlier June projection of 3.4-3.7 per cent. And the retail inflation projection for the first quarter of 2020-21 has been pegged at 3.6 per cent. On the whole, inflation scenario looks quite benign.

The industrial growth figures for June had another message for the pace of the overall economic growth in the first quarter of the current financial year, to be captured through the gross domestic product (GDP) numbers to be released by the end of August. The January-March 2019 had shown a GDP growth print of just 5.8 per cent and, if industrial growth figures for the April-June 2019 are any indication, the GDP growth figures for the first quarter of the current financial year may continue to be a huge disappointment. Such grim forecasts are corroborated by consumption side data with recent reports indicating a double-digit dip in sales of all types of passenger vehicles in the last several months. Sales of passenger vehicles fell by over 13 per cent in January-June 2019. Corporate earnings for the April-June 2019 quarter too have remained modest at less than 6 per cent.

Indeed, the Reserve Bank of India has already revised downward its GDP forecast for 2019-20 – from the earlier level of 7 per cent to 6.9 per cent. The lower projection was triggered by its assessment that both domestic and external demand conditions had weakened.

With Prime Minister Narendra Modi clarifying his government’s stance on some of the key economic challenges, the outlook for economic policy is clearer. In an interview he chose to give to an economic daily, Mr Modi sent our four following signals: He asked bankers to step forward to revive lending and assured them no witch hunt will take place for their lending decisions taken in good faith and with sound business rationale. He told industry leaders to invest more and assured them that there would be no tax harassment. He said there would be enough room in the market for producers of traditional petrol/diesel-run vehicles and electric vehicles. And four, he wanted a big push to both asset monetisation (also known as disinvestment or privatisation) and asset recycling (sale of existing infrastructure projects). Now with a new direct taxes law in the offing, whose report indicates a lower corporation tax rate for all companies, tax incentives for middle-class individuals earning Rs 50 lakh per annum and many other tax simplifications and incentives, the Indian economy could soon see some more direct tax reforms. What still remains to be seen is how the government would tackle the problems of falling sales in the automobiles industry.

A significant change in the regulatory space for airports in the country was effected with the passing of the Airports Economic Regulatory Authority of India. (Amendment) Bill, 2019. The amended law has brought about two significant changes. One, it has raised the threshold for annual passenger traffic for airports before they could be defined as major airports and, therefore, be regulated by the Airports Economic Regulatory Authority of India or AERA. From an annual passenger traffic of 1.5 million earlier, the new threshold is now 3.5 million. This in effect has reduced the scope of AERA’s regulation from 33 airports earlier to just about 16. In other words, a large number of airports would go out of the purview of AERA and its regulation of tariffs, fees for aeronautical services and performance standards of services offered by the service providers. Since, there are about 102 airports in the country, the law has now ensured that as many as 17 more airports would now come under the purview of the Airports Authority of India (AAI), a state-owned organisation. The amended law has brought about another significant change by taking out of AERA’s regulatory jurisdiction all airports to be awarded on the basis of pre-determined tariffs or tariff-based bidding. Although AERA would be consulted in advance on such tariffs, the new reality is that the regulator would effectively have no role in determining tariffs for such airports every five years or periodically, as it does for other airports. The change in the law has raised many troubling questions on whether an independent regulator’s role in airports has been whittled down and the government and AAI have secured for themselves a greater say in matters of tariffs and regulation of airports.

Two major laws on labour reforms were mooted, one of which was passed by Parliament and the other is under its scrutiny. The one that was passed, The Code on Wages, 2019, has sought to regulate wage and bonus payments in all employments where any industry, trade, business, or manufacture is carried out. The Code replaces the four laws and replaces them with one simplified law. The four laws are: the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976.

Similarly, the other labour reform law, yet to be passed, has significant provisions. The Occupational Safety, Health and Working Conditions Code, introduced in the Lok Sabha on July 23, 2019, will apply to all establishments employing at least 10 workers, and to all mines and docks. While it will not apply to apprentices, it will make special provisions for certain types of establishments and classes of employees, such as factories, mines, and building and construction workers. The new law will simplify various rules specified in different pieces of legislation with regard to the duties of employers, rights and duties of employees, working hours duration, leave, working conditions and welfare facilities.

The government also got the much-awaited Motor Vehicles (Amendment) Bill, 2019 passed by Parliament to provide for. Greater road safety, better standards for motor vehicles and higher penalties for violation of road driving rules. The amended law has simpler provisions for compensation for road accident victims, compulsory insurance of all road users through the creation of a national fund, protection for good Samaritans coming out to help road accident victims, a policy for recall of vehicles with manufacturing defects and a special policy regime for taxi aggregators.

The Special Economic Zones Act, 2005 was amended to allow trusts to be recognised as persons so that they too could establish units under such zones. The Indian Medical Council (Amendment) Bill, 2019 was passed to supersede the existing Medical Council of India and vest its powers in a Board of Governors, to be assisted by a secretary-general, to be appointed by the Union government.

A new legal framework was approved for the setting up of a New Delhi-based International Arbitration Centre to conduct arbitration, mediation and conciliation proceedings. This was achieved with the passing of the New Delhi International Arbitration Centre Bill, 2019. The new Centre will be offer an opportunity for Indian businesses and traders to have their international arbitration cases tried within the country, instead of flocking to those abroad in London or Singapore.

In a bid to uproot the evil of unregulated deposit taking schemes, Parliament passed a law that provided a mechanism by which unregulated deposit schemes could be banned in a bid to protect the interests of depositors.

The Insolvency and Bankruptcy Code (Amendment) Bill, 2019 was passed by Parliament to address three specific weaknesses in the existing law. One, it has strengthened provisions related to time-limits for resolution of insolvency cases. Two, it has specified the minimum pay-outs to operational creditors in any resolution plan. And three, it has outlined the manner in which the representative of a group of financial creditors (such as home-buyers) should vote on any resolution plan.

The Budget Session of Parliament after the formation of the new government proved to be highly productive in terms of the number of new laws passed. In all, 38 bills (not including the Finance and Appropriation Bills after the Budget) were introduced in Parliament between June 17 and August 7. As many as 28 Bills were passed by Parliament in these seven and a half weeks. Several of these laws had significant implications for economic policy, industry and the governance structure. According to PRS Legislative Research, this was the highest number of bills passed in any session in the last ten years. The next best performance was in the Winter Session of 2009 and the Monsoon Session of 2018, which saw the introduction and passage of only 10 bills each.

The Bharatiya Janata Party retained power at the Centre after the general elections in April-May 2019 with a majority that was much greater than what it had got five years ago in 2014. Expectations from industry and the stock markets ran high. More economic reforms and more business-friendly policies were expected in the new government’s first Budget presented to Parliament on July 5. But the Budget was reassuring for industry only in its broad intent and vision. Several proposals like the higher taxes on the super-rich and, by implication, on the foreign portfolio investors, who mostly operate in India as trusts, raising the threshold for compulsory public shareholding, a half-hearted approach to reducing corporation tax rates for all companies and an increase in the Customs duty on a wide range of goods upset industry and the markets. While the Budget failed to enthuse the major stakeholders in the economy, fears of an economic slowdown began to loom large. Even as the debate goes on whether the slowdown is structural, cyclical or both, key economic data sets available in August point to the challenges ahead even as a flurry of new economic laws show the government’s keenness to guide the governance system to a new direction.

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About the Author

After a 10-year long stint with Financial Express from 1978-1988, in different capacities in the areas of news gathering and news management, A.K. Bhattacharya joined The Economic Times in 1988 and functioned as its Chief of Bureau from 1990 to 1993. In 1994, he became its Associate Editor. He joined The Pioneer as Executive Editor in September 1994, stabilised the newspaper before becoming its Editor in 1995. He joined Business Standard in 1996 as Editor, News Services. Was its Resident Editor in Mumbai from July 1996 to September 1997 and helped the newspaper launch its Mumbai edition. From October 1997 to May 1998, he functioned as National Editor leading the paper's news operations. As Managing Editor of Business Standard between June 1998 and April 2000 and as its Group Managing Editor between May 2000 and October 2011, he oversaw the newspaper's news operations and editorial administration. From November 2011 to July 2016, he was the Editor of Business Standard. Since August 2016, he has been the Editorial Director of Business Standard on a part-time basis. He has been writing a regular column - New Delhi Diary - commenting on government affairs, since 1990 - that appeared in The Economic Times, Pioneer and now in Business Standard. Since 1997, he has been writing another column - Raisina Hill - commenting on developments/issues concerning bureaucracy.